For a fuller picture of the world economy, take a look in the shadows
Andrew Sheng says we may have underestimated the resilience of the world economy to stagflation because there is a significant sector of economic activity – the shadow market – that we do not measure
In solving mysteries, Sherlock Holmes used to say that “once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth”.
We are so used to looking for keys under the light of the lamp that we often forget to look in the shadows.
We live in an age when we base all decisions on “facts and numbers”. The trouble with statistics is that all measurements are subject to errors and omissions. GDP statistics are notoriously inaccurate because there are both measurement errors and conceptual errors of under-measurement. The conceptual error comes from the fact that gross domestic product measures production, but it ignores costs that are not easily measured. The most commonly ignored output measurement is housework.
The other areas of under-measurement are spillovers and externalities such as pollution costs, which are difficult to measure, and also the costs of resource depletion, such as destruction of biodiversity.
The informal economy, or shadow market, comprises all activities that are not regulated by the state
There are of course two parts of the economy – the formal, which is subject to law and taxation, and the informal. The informal economy, or shadow market, comprises all activities that are not regulated by the state. These may include illegal activities, but also comprise activities that are typically not subject to taxation (such as legal tax avoidance) or not regulated or measured, such as casual labour and local trading. Actually, in many rural and remote areas, as well as cities, the poor generate business activities that are outside the watch of the police and often below the tax levels.